Wipro rallies 10% after Q4 earnings. What analysts say

NEW DELHI: After Tata Consultancy Services (TCS) and Infosys' not-so-surprising numbers, Wipro's March quarter results surprised many, especially a lower-than-expected sequential fall in margin.

Analysts say they are liking the IT major's progress under the new management and are impressed by its strong margin management, deal wins (even as they were concentrated) and guidance for the June quarter. That said, they warned that rich valuations offer limited potential upside for Wipro shares.

The stock rose 9.62 per cent to hit a 52-week high of Rs 472.50 on BSE.

Wipro has been lagging its larger peers in the past few years, with only low single-digit organic constant currency revenue growth. But the latest quarter was a third straight three-month period in which Wipro delivered strong results on both revenue and margins fronts.

Edelweiss noted that the company outperformed its expectations with an operating margin of 21 per cent, despite handing out wage hikes to 80 per cent of its employees in January.

"Wipro’s turnaround has been led by the strategy of the new CEO, coupled with a strong demand environment. Along with these, improved execution is likely to drive earnings going ahead," it said.

Kotak said the company's large-deal focus and customer-first approach have begun to show results with a new mega-deal announcement and $1.4 billion in deal values for the quarter. Growth from large clients, energising of the organisation and large deal wins are a good indicator of progress, it said, raising its FY22-24 revenue estimates for Wipro by 2-3 per cent to capture in the Ampion acquisition and higher organic revenue growth.

Antique Stock Broking said that the total contract value (TCV) of the company's order book increased 33 per cent YoY to $7.1 billion in the second half of FY21. This included a $1.2 billion deal win in December and a $1.4 billion one in the March quarter.

The company is expecting a large deal pipeline to be better going ahead than what they were in the second half. "Wipro has delivered a third consecutive quarter of strong performance on revenue and margins; which is comparable to its large cap peers. However, the company may need to report consistent strong comparable growth in line with Infosys/TCS to bridge the valuation gap further," added Antique, suggesting a target of Rs 500 on the stock.

Wipro on Thursday reported a nearly 1 per cent quarter-on-quarter fall in its consolidated net profit to Rs 2,974.3 crore for the quarter ended March, which was higher than analysts’ estimate of Rs 2,831.2 crore. The company reported a nearly 4 per cent quarter-on-quarter rise in consolidated revenues to Rs 16,245.4 crore for the quarter, which was also higher than analysts’ estimate of Rs 15,956.4 crore.

On a constant currency basis, the IT services segment’s revenues grew 3 per cent sequentially, the company said. Wipro said its IT services operating margin for the quarter stood at 21 per cent, an expansion of 344 basis points on-year.

The IT firm has forecast 2-4 per cent growth in the quarter to June, setting the base for a double-digit expansion— its first in about 10 years.

The Bengaluru-based IT services firm expects Q1 FY22 revenue to be between $2.2 billion and $2.24 billion, without factoring revenues from recent acquisitions, UK-based IT consulting firm Capco and Australian cyber security specialist Ampion.

CLSA said IT services revenue growth at 4 per cent QoQ, with 2.8 per cent organic growth, was above consensus estimates.

"The margin impact of wage hike was well managed with Ebit margin down 70 basis points, half the expected drop," CLSA said while adding that it likes aggression Wipro has adopted under the new management. That said, multiple moving parts, such as acquisition activity , large deals, and internal restructuring distorts the picture. It has recommended wait and watch given elevated valuations.